The CAPM holds, RF =4%, and the expected return on the market portfolio is 6%. Assume continuous

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The CAPM holds, RF =4%, and the expected return on the market portfolio is 6%. Assume continuous compounding. A company will sell 1 unit of gold a year from today. Assume the mean price of gold GT to be $100 in a year, and the standard deviation of the gold price GT to be $20. Assume that the gold = .9.

(a) Find the value of the firm if it did no hedging.

The required rate of return is 4%+0.9*(6%-1%)=8.5%

The value of the firm is 100/e^(0.085*1)=

(b) If the firm went short $ times the value of the firm in (a) of the market portfolio, and invested the proceeds in riskless debt, then what would be the hedged firm's beta? What would be its expected return, and what would be the market value of the firm?

(c) Find the forward price of a 1-year forward contract on a unit of gold. Find the value of the firm if it hedged its gold price risk in the forward market.